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Tag Archives: QE

How should we judge Mark Carney’s long-awaited “forward guidance”? Do the Bank of England’s pronouncements on the future path of interest rates amount to authoritative foresight or meaningless waffle?

I’d like to be positive. The new Governor has barely got his feet under the table and is a decent man. Amidst sky-high expectations, he faces a formidable task. Yet my instincts tell me that “forward guidance” is counter-productive and could even be highly dangerous.
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Oil prices are on the up. Since early June, Brent crude has surged from just over $100 to reach $108.7 per barrel last week – a three-month high. West Texas Intermediate, the US oil benchmark, meanwhile hit $107, a level not seen since March 2012.

Rising energy costs hit consumers and firms, hinder growth and also stoke up inflation, especially in an oil-importing country like the UK. It’s particularly concerning that crude is rising despite growing evidence that the global economy is once again starting to slow.
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As Mark Carney takes the reins at the Bank of England, expectations could hardly be higher. The Canadian’s successful stint at the helm of his native central bank, and his chunky compensation package (almost three times that of his predecessor), have seen him credited with near super-human powers. Throw in his youth and film-star good looks and the arrival of Fort Smith’s most famous son has taken on the air of an economic “second coming”.

The UK is locked in its weakest recovery in statistical history. Revised figures suggest the economy remains 3.9pc smaller than its 2008 pre-crisis peak, even worse than the previously estimated 2.6pc shortfall. Everyone wants to believe that recovery is within reach and maybe, just maybe, the smiling Canadian with degrees from Harvard and Oxford is the missing ingredient.

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The Japanese economy is supposed to be recovering. Just a couple of weeks ago, official data indicated an expansion of 0.9pc during the first three months of this year. That placed the third-largest economy on earth among the developed world’s top-performers.

Here in the UK, our GDP increased by just 0.3pc during the first quarter of 2013, while the United States registered 0.6pc growth. The Eurozone, meanwhile, remained stuck in reverse gear, its economy contracting 0.2pc over the same period.
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The eurozone crisis seems on the cusp of some kind of denouement. The trouble is that no-one can possibly know what that long-awaited outcome will be. Maybe Germany will finally relent and agree to massive monetization and “debt-pooling” – effectively bailing-out the rest of the eurozone. Or perhaps, once again, the eurocrats will “extend and pretend”, building an even higher financial firewall, while continuing to muddle through.

The danger is, though, that the markets lose patience, sparking a violent “Lehman style” financial meltdown, with all the global fall-out that would entail. While that would be disastrous, the worst of all possible outcomes, there is a growing sense that it is only another “Minsky moment”, combined with some serious civil unrest, that will force the eurozone’s main policy players to face the really tough decisions.
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British banks are sitting on “£40bn of undeclared losses”. So says Pirc, the UK’s leading shareholder advisory group. What’s more, Pirc argues, the massive backlog of undisclosed bad debts is preventing our banking sector from making vital, growth-boosting loans to credit-worthy businesses and households.

It doesn’t surprise me that some of the UK’s leading banks are technically insolvent. What does surprise me is that it’s taken until last week for a respected professional body like Pirc to state the obvious.
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For some time, International Monetary Fund supremo Christine Lagarde has argued that a stronger “global firewall” is needed, to contain “any future financial crises”. Well, at this weekend’s IMF-World Bank meetings in Washington, she announced there are now “firm commitments” from member states to boost the IMF’s lending power.

The extra resources, Lagarde’s officials dutifully claimed, will be “available for the whole IMF membership, not earmarked for any particular region”. Everyone knows this is nonsense. This higher IMF firewall has been created, the money being reluctantly made available by member states, because governments around the world are petrified the eurozone could implode, sparking another “Lehman moment”.
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“Today the problem is solved,” declared French President Nicolas Sarkozy just five weeks ago. “How happy I am a solution to the Greek crisis, which has weighed on the economic and financial situation in Europe and the world for months, has been found”.

Just when you hoped it really was “solved”, the “eurozone crisis” has roared back onto the global agenda. Like a dripping tap, a lingering bad smell, the fundamental contradictions at the heart of monetary union can be blanked-out for a while but refuse to go away. The busted banks, the grotesque indebtedness, the inherent contradictions – in recent days they’ve all burst back into view.
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